Rating unchanged but risk perception growing

International Credit Rating Agency Fitch did not change Turkey’s outlook in its recent evaluation of the country, which resulted in comforting the markets slightly. Many people were not expecting Fitch to lower the ratings with elections approaching, but looking at the positive reaction of the markets, we concluded that “it means some uneasiness did exist.”

Turkey’s rating was BBB- and the outlook was stable according to Fitch, which said low oil prices and ample liquidity were good for the Turkish economy.

However, Fitch Ratings Senior Director Paul Rawkins said on Monday inflation in Turkey is 50 percent more than the Turkish Central Bank’s target and the outlook did not allow for interest rate cuts. Fitch forecasts inflation at 7.5 percent this year and 6 percent in 2016, he said.

In other words, Fitch did not lower Turkey’s rating; however it is not positive about the inflation rate.
The same day, another rating agency, Moody’s, issued a report which closely concerns Turkey. The report said the currencies of countries which have large pending external debt payments, such as Turkey, Malaysia and Chile, have depreciated, making it more expensive for companies to service foreign currency debt. It said countries with large current account deficits, such as Turkey and South Africa, are more susceptible to external pressures due to the difficulty in financing their deficits.

In short, we need to say that even though Turkey’s rating did not change, risk perception for the economy has increased. The most important reason for this is of course the serious valuation of the dollar due to the nearing Fed interest rate raises and also that our economy was unprepared for this. Thus, it should not be surprising if there is a decline in the rating in the coming term.

Political risks

Actually, as growth and unemployment figures show, the problems of Turkey’s economy can be considered to have already begun. Because of the risks starting to be realized, serious declines have been observed in consumer confidences. The consumer confidence index in March has declined by a serious rate of 5.4 percent. The index has gone back to six years ago, in other words to the level of the 2009 global crisis, at 64.39. Similarly, serious declines have been observed in household trends.

We can say this outstanding fall in confidence is because of the effects of the rapid climb of the dollar combined with the bad management and domestic political tensions that laid the ground for that.

Based on this, it is also expected that the latest clashes within the ruling party Justice and Development Party (AKP) will increase the erosion in confidence. Domestic political disputes, survey results as the election approaches and debates on what kind of a government will be formed will obviously further restrain the economy, which is already in a volatile state.